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Just when it seemed like the market was finding a bottom around 800 on the S&P and 8,000 on the Dow, the major indexes found a way to go even lower this week.
The major indexes crumbled below major support this week and this brings us to a new world of potential weakness ahead as this bear market continues with seemingly no end in sight.
Many analysts forecast a short term bounce, which of course is possible, but previously strong support at the Dow 8,000 level and S&P 500 800 level will now become a wall of resistance for a market attempting to climb to higher levels in the future.
The Dow has breached its November lows and the S&P 500 just missed its November intraday low.
In my work at Wall Street Sector Selector, I do a lot of work with Point and Figure charting, and the S&P 500 paints a clear but grim picture of the current market environment with the Double Bottom Breakdown on February 17th and the columns tracking well below the bearish resistance line. And now instead of being support, the 800 level on the S&P becomes resistance on the way back up.
The scariest part of all of this is that next significant support on the major indexes goes all the way back to the mid 1990s where we find the next major line of support is at the 650 level in 1996-1997, a full 15% below where we stand today.
Furthermore, other than Gold and Silver, there are no sectors currently exhibiting "bull market" status and this makes our search for profits even more illusive.
The markets are clearly oversold and one could make a good argument for a bear market rally starting this week, but with the wall of resistance just above, it's hard to imagine that such a rally could have any legs.
Everything I see points to more pain ahead. And with the major indexes down nearly 50% from their highs of October, 2007, we have seen enough pain already. Cash is a viable position and certainly makes for better sleeping through these difficult days.
This week has important economic reports on tap, and on top of that, we await the Obama administration announcing the fate of the Big 3 auto companies.
Some of the numbers in today’s market are truly shocking.
Five out of the thirty Dow stocks are below $10 per share with the likes of General Motors (GM) at $1.77 and Bank of America (BAC) at $3.81, almost to the penny stock range, with B of A reaching a record low and Citi an 18 year low amidst continued rumors of nationalization of these former financial behemoths.
The Dow (DIA) and S&P (IVV) are now nearly 50% below their October, 2007, highs and it’s becoming more and more likely that we are well into but not nearing the end of a secular bear market.
On the other side of the ledger, gold topped $1,000 this week. GLD, the Spdr Gold Trust, set new highs with its holdings exceeding 100 metric tons which puts GLD’s holdings in the same category as the United States, France and Germany.
In my view, GLD is now extremely overbought and due for a correction; however, clearly the yellow metal is in a long term bull market as the flight to safety continues.
Adding to the gloom, the Dow Theory trading system issued a new bear signal this week with both the Dow Jones Index and Dow Jones Transportation Index making new lows.
Dow Theory is perhaps the oldest trading system still in use today and was invented by Charles Dow himself.
Writing in the Wall Street Journal on January 31st, 1901, Charles Dow compared the ebb and flow of the ocean to the action of the stock market when he said, "A person watching the tide coming in and who wishes to know the exact spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market."
So if Charles Dow is correct as he speaks to us from more than 100 years ago, there is more downside ahead to this bear market.
The Week Ahead
Several important economic reports could move the markets this week.
Tuesday: December Case Schiller Housing Index, February Consumer Confidence
Wednesday: January Existing Home Sales
Thursday: Weekly Jobless Claims, January Durable Goods, January New Home Sales
Friday: 4th Quarter Gross Domestic Product, Chicago Purchasing Managers Index, February Consumer Sentiment
Weekly Leaders: ProShares Inverse S&P 500 (SH), ProShares Inverse Dow30 (DOG), Spdr Gold (GLD)
Weekly Laggards: SPDR Financials (XLF), iShares Korea Index (EWY), Oil (USO)
These are truly dangerous and historic times and quite possibly there are new lows still ahead.
All the best,
Wall Street Sector Selector
All information presented herein is for general information only and deemed to be from reliable sources, but we cannot guarantee its accuracy. Readers are strongly advised to check with their investment counselors before making any investment. There is risk of loss in all investment activity.
02-22-2009 6:40 PM